Why Does Credit History Factor Into the Cost of Car Insurance?

Most major car insurance companies are using your credit score as a very important factor in determining the rates you pay. But why does your credit history have anything to do with insurance?

Right or wrong, studies have shown that consumers with higher credit scores tend to have fewer accidents and claims that consumers with poor credit. Insurance companies use credit scores in an attempt to predict the likelihood of whether or not you will file a car insurance claim.

Critics contend that using credit score to determine car insurance rates results in higher premiums paid by poorer consumers. Since poor consumers are more likely to have outstanding credit balances and past due bills, their credit score tend to be lower than higher income consumers who can pay their bills on time.

The effect of charging higher premiums based on lower credit scores forces these buyers to either sacrifice coverage to lower premium or raise their deductibles. By raising deductibles, they are less likely to file a claim because more money will come out of their pocket at claim time.

Conversely, consumers with excellent credit will pay the lowest car insurance rates because insurance companies believe they are less likely to be involved in an accident and less likely to file claims. Even if they do have an accident, some consumers will understand the impact filing a claim will have on their future premiums, and they will elect to pay for the damage out-of-pocket rather than turning it into their insurance company.

Whether you agree with basing car insurance rates on credit scores or not, it’s a policy that most insurance companies have adopted and will continue to use.

The best practice going forward is to take the steps necessary to improve your credit score including paying off outstanding balances and clearing up possible errors on your credit reports. Even a small improvement in your credit score can result in a large savings on your next car insurance bill.